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Report highlights

Over the past two decades, Australia has failed to build significant positions in the technological revolution that has transformed the global economy. In high-tech industries such as software and electronics Australia has been left behind, and in emerging sectors such as biotechnology, it threatens to be.

There is no intrinsic reason for Australia's poor innovation performance. Australia is not less entrepreneurial than other developed countries or less scientifically creative. We have the human and financial resources. The challenge is to ensure policy settings provide the right incentives to encourage and develop frontier technologies such as biotechnology and nanotechnology, as well as ensuring the diffusion and upgrading of new technologies within established industries.

The CEDA report contains analysis of Australia's recent innovation performance by a group of leading innovation experts. Key findings include:

• Australia has failed to develop financial and organisational vehicles capable of managing the inherently risky nature of investment in technological innovation, which is characterized by far greater levels of risk than routine production.
• In no successful economy is innovation risk managed by markets alone. Nations that have established sets of institutions to achieve risk-sharing have succeeded in innovating in complex and uncertain fields such as software, electronics and the life sciences. Those that haven't developed such 'national systems of innovation' have failed to build those industries. In almost no country other than Australia does the stock market attempt to finance innovation in its early phases.
• If Australia wishes to participate in technology creation (as opposed to simply consuming technology) appropriate risk management vehicles need to be developed.
• Policy attention has tended to focus on science-based industries with high levels of direct R&D and strong links to universities (such as computing, electronics, pharmaceuticals and biotechnology). While these high-tech industries are very important and can potentially act as transforming platforms, they are also very small (accounting for only 3 per cent of GDP in most OECD economies). The role of low and medium technology industries tends to be neglected. This is a serious failing. These industries (such as food processing, timber products, textiles, wine, mechanical engineering and services such as transport and health) are intensive users of R&D and scientific knowledge.
• Economic growth is based not just on the creation of new sectors but on the internal transformation of sectors that already exist-that is, on continuous technological upgrading. Potential growth trajectories may rest as much on sectors such as engineering, food, wine and vehicles as on radically new sectors such as ICT or biotechnology.
• Australia has a conservative innovation system that is only slowly generating new paths of technological accumulation. The majority of innovation is incremental, involving improvements in products, processes and methods and is based on knowledge sourced from overseas. Despite a decade of strong economic growth, many standard indicators of innovation have been failing.
• While Australia has high levels of technological specialization in mining and agriculture and patenting in biotechnology and pharmaceuticals has grown rapidly over the past decade, we have one of the lowest levels of change in technological specialization among OECD countries. Australia has not seen the emergence of any major new sector such as telecommunications in Finland and Sweden, oil in Norway, semiconductors in Korea and Taiwan and motor vehicles in Germany.

The report argues that an effective national innovation system plays a central role in enhancing competitive capability. If current weaknesses in Australia's innovation track record are not addressed, our future economic development will be seriously impeded.